Optimal Capacity Conversion for Product Transitions Under High Service Requirements

Abstract

We consider the capacity planning problem during a product transition in which demand for a new-generation product gradually replaces that for the old product. Capacity for the new product can be acquired both by purchasing new production lines and by converting existing production lines for the old product. Furthermore, in either case, the new product capacity is "retro-fitted" to be flexible, i.e., to be able to also produce the old product. This capacity planning problem arises regularly at Intel, which served as the motivating context for this research. We formulate a twoproduct capacity planning model to determine the equipment purchase and conversion schedule, considering (i) time-varying and uncertain demand, (ii) dedicated and flexible capacity, (iii) inventory and equipment costs, and (iv) a chance-constrained service level requirement. We develop a solution approach that accounts for the risk-pooling benefit of flexible capacity (a closed-loop planning approach) and compare it with a solution that is similar to Intel's current practice (an open-loop planning approach). We evaluate both approaches with a realistic but disguised example and show that the closed-loop planning solution leads to savings in both equipment and inventory costs, and matches more closely the service level targets for the two products. Our numerical experiments illuminate the cost tradeoffs between purchasing new capacity and converting old capacity, and between a level capacity plan versus a chase capacity plan.

Decision model for product rollover in manufacturing operations

“…The first decision evident from the literature review in the Capacity category is to decide on the required production capacity (Carrillo and Franza 2006, Bilginer and Erhun 2010, Li et al 2014). Prior to the start of production of one new product replacing another, decisions regarding production capacity need to be considered.…”

“…When the decisions in Phases 1 and 2 are taken, the manufacturing company has sufficient input to consider the required production capacity (CA1) (Carrillo and Franza 2006, Bilginer and Erhun 2010, Li et al 2014. During a product rollover, demand for the old product decreases, while that for the new product increases.…”

“…The capacity needs to be distributed accurately between the new and old products. Excessively high capacity entails higher costs then needed (Li et al 2014). Excessively low capacity, on the other hand, means that the company may not be able to satisfy the demand and will end up with backorders.…”

“…Excessively low capacity, on the other hand, means that the company may not be able to satisfy the demand and will end up with backorders. If the new product will be produced with the same manufacturing equipment, the production capacity will be restricted during the product rollover (Li et al 2014). If the old and new products are supposed to be produced with different manufacturing equipment, the production capacity will be more flexible.…”

Status review and research strategies on product-service supply chain

“…The global market is on the shift from product to service in the last decade. Traditional manufacturing firms are striving to change their product-centred strategy by offering the product-service packages; 1–3 however, great arduousness was found in practice. 4,5 One of the main impediments lies in the service supply chain (SC) management.…”